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Jordan: Low Interest Rates and Poor Investment Incentive

Pressures on the Jordanian economy continued to grow over the first six months of 2016. As registered refugee numbers remain around the 650,000-mark and funding remains woefully short of the necessary budgets, the Hashemite Kingdom’s economic indicators have achieved similar poor rates of success. Growth estimates have remained low, the tourism sector is subdued and budget deficits continue to expand. Several agreements have been made concerning trade, but more must be done if the economy is to get back on its feet.

On the economic front, growth expectations for the Jordanian economy remain subdued, with no new estimates being released since the publication of the World Economic Outlook (WEO) April 2016 edition, which estimated GDP growth rates starting 2016 at 3.20%, 3.70% and 4%, respectively, for the coming 3 years. However, on a positive note, Jordan’s Consumer Price Index (CPI) managed to erase a portion of the decrease over the first quarter of the year, with the decrease over the year at 1.12%. Over the first three months of 2015, the decrease was at 1.89%.

Tourism in Jordan began 2016 on a sour note. Over the first 3 months of the year, the total number of tourists (including same day and overnight travelers) displayed a 6.80% decline to 1.05M, according to the Ministry of Tourism and Antiquities. Total travel receipts reflected this poor performance, as ministry data indicated a 4.6% downturn to JOD 612.4M ($864.71M). The Ernst & Young Middle East hotel benchmark survey also reflected the general negativity regarding the sector, as the occupancy rate over the first six months of the year revealed a drop from 56% to 49%, while Amman’s average room yield (ARY) over the same period displayed an 11.60% annual drop to $78, despite the average room rate (ARR) gaining 1.70% y-o-y to $160.

Jordan’s trade also portrayed weak performance. By H1 2016, Jordan’s trade deficit expanded by 2.70% annually to JOD 4.50B ($6.35B). This widening was primarily due to the 9.58% y-o-y drop in total exports to JOD 2.10B ($2.97B), and despite a 1.13% downtick in total imports to JOD 7.01B ($9.89B) over the same period. The drop in exports was primarily linked to the 42.44% drop in the export of crude potassium to JOD 124.47M ($175.75M) and the 1.50% y-o-y decrease in knitted articles of clothing to JOD 427.41M ($603.51M). In contrast, Jordan managed to improve its phosphates exports by 2.75% to JOD 168.82M ($238.38M) as a result of a new trade agreement with India to boost exports of this commodity. Meanwhile, the decrease in the Kingdom’s imports could be traced back to decreases in the value of imports of most food items. However, significant increases in the import of cereals, electric machinery and vehicles played a major role in keeping the trade deficit at an escalated level. In details, cereals imports grew by 68.63% y-o-y by June to JOD 348.52M ($426.8M), while imports of electric machinery and vehicles each increased by 23.17% and 10.07% to respective values of JOD 432.15M ($610.20M) and JOD 657.86M ($928.90M) over the same period. Liquefied natural gas (LNG) also witnessed a significant rise in its level of imports, rising from JOD 88.38M ($124.79M) by June 2015 to JOD 476.23M ($672.44M) over the same period in 2016 as a result of the two LNG contracts awarded to suppliers in Switzerland and Spain during the start of the year.

The negative effects of Jordan’s economic status extended to the fiscal sector as well, as the general budget, inclusive of foreign grants, recorded a fiscal deficit of JOD 22.10M ($31.21M) by April 2016. In comparison, the general budget was at a surplus of JOD 164.70M ($232.56M) over the same period in 2015. Disregarding foreign grants, the fiscal deficit demonstrates little change, registering a deficit of JOD 174.30M ($246.11M) by April 2016, compared to a deficit of JOD 82.2M ($116.07M) over the same period in 2015. Similarly, gross outstanding public debt rose 1.96% since the start of the year to reach JOD 25.37B ($35.82B), equivalent to 93.7% of the GDP, compared to a lower 93.4% by December 2015. Outstanding external public debt accounted for JOD 9.50B ($13.42B) following a 1.21% y-t-d increase in value, while a 2.22% y-t-d rise in outstanding domestic public debt to JOD 15.86B ($22.40B) constituted the remaining portion.

On the monetary front, Jordan’s money supply (M2) continued to increase at a slower pace than last year. As of May 2016, domestic liquidity had gained 1.20% y-t-d to register JOD 32.00B ($45.18B), compared to a 4.50% rise a year earlier. Meanwhile, total credit facilities extended by licensed banks witnessed a 5.03% gain during the first 6 months of 2016 to JOD 22.17B ($31.30B). Over the same period, total deposits at licensed banks increased by a slower rate of 1.23% to JOD 33.00B ($46.60B). In details, 79.41% of these deposits were denominated in the local currency, with the remainder held in foreign currencies. The loan to deposit ratio as of June 2016 stood at 67.18%, compared to a lower 64.74% at the end of 2015.

The economy is witnessing a poor investment environment, so the weighted average rate on overdrafts was reduced to 7.77% by June 2016, down from 8.01% by end-2015. Meanwhile, the weighted average rate on loans and advances had descended to 8.16% by May 2016, but then increased to 8.38% by end-June.

The Amman Stock Exchange (ASE) finally succumbed, ending the first six months of the year at a 2.11% y-t-d decline to 2,091.35 points, despite the gauge increasing 0.73% in Q1 2016. The index’s market cap lost 4.94% y-t-d to JOD 16.81B ($23.74B). After the delisting of two securities in March, the market cap declined 3.54%. Non-Jordanian investors assumed a net-buying position, as net investments totaled JOD 141.3M ($199.52M) by June. The month of June represented an inflection point, however, and whether or not the trend has continued in the wake of Brexit and the shock it caused in global markets must be considered, as some investors may exit market positions to lock in returns or cut losses.